California investigates 10 life insurance companies over lack of payments to beneficiaries

California Insurance Commissioner Dave Jones has stepped up the already intense pressure on life insurance companies accused of not paying death benefits, vowing to hold market conduct examinations of 10 of the biggest carriers.

The companies are accused of failing to investigate whether life insurance customers have died and failing to find their beneficiaries – even though the companies actively searched for deceased annuity customers so that insurers could stop making annuity payments.

Market conduct exams are a serious challenge for the industry, which is now facing investigations into its claims-paying practices by 35 states. These exams probe alleged violations of the law and can serve as the basis for legal enforcement actions, according to Jones. Actions may include fines, restitution and possible license suspensions.

Companies that also face a 10-state task force investigation are MetLife, John Hancock, Prudential, Nationwide, The Hartford, Sun Life Financial, New York Life, Lincoln National and Aegon Group, which includes Transamerica and Pacific Life. It’s likely that other carriers will face similar probes in other states.

Jones’ investigation, which he’s conducting jointly with California Controller John Chiang, mirrors a hearing MetLife faced on May 19, when it appeared before Florida Insurance Commissioner Kevin McCarty to answer questions on the same issue. (Here’s more on the Florida life insurance hearing.)

The evidence stems from insurers’ use of the Social Security Administration’s Death Master file, which since the late 1980s has supplied detailed records of everyone who has died, including their Social Security number, last address, date of birth and date of death.

This database is available to the public for a fee. Insurers have used it to cut off annuity payments that end with the death of the payee, but haven’t used it on a regular basis to help locate beneficiaries and pay death benefits when an insured dies, according to state insurance commissioners.

During a May 23 California hearing, officials quoted academics who said that hundreds of millions of dollars in life insurance go unclaimed each year for one simple reason: The beneficiaries don’t know the money exists.

Among the possible violations of California law listed at the hearing were:

• Unfair claims settlement practices.

• Failure to “escheat,” or turn over money to the state, when beneficiaries could not be found.

• Failure to adequately control and monitor dormant retained asset accounts, which insurers use to pool benefits that haven’t yet been collected.

Paying themselves

“Do (insurers) use cash values to pay themselves premiums after the death of the insured?” California regulators asked in a PowerPoint presentation just prior to the testimony of MetLife, the sole witness in the hearing.

The insurer was expected to acknowledge – as it did in Florida – that it didn’t use the Death Master file until 2007, when it began matching the list against its customers’ policies. The company has said that it hadn’t used the database on a regular basis until the end of last year.

However, MetLife spokespeople have denied doing anything illegal.

“Our priority is to pay insurance benefits to those who are entitled to them,” said spokesperson Chris Breslin in a statement prior to the hearing. “When beneficiaries cannot be located, we turn those benefits over to the state.”

A small percentage

Using the Death Master file during 2007, MetLife turned up $51 million in unclaimed assets that went to beneficiaries and another $32 million that went to the states.

While that amount may seem large, it is less than 0.2 percent of the $44 billion in death benefits paid on individual life insurance policies over the same period, which dates back to the 1950s.

“Our experience … has shown us that over 99 percent of life insurance claims proceeds are paid as a result of routine notification and claim submission processes,” said Breslin.

$1 billion in life insurance unclaimed

At the Florida hearing on May 19, McCarty said he estimated that life insurers may owe beneficiaries and the 50 states more than $1 billion in unclaimed assets – money that is sitting in the insurers’ retained asset accounts, which currently hold more than $28 billion, according to California officials.

A McCarty spokesman said the $1 billion figure came from Verus Financial LLC, a Connecticut firm that has been hired by 35 states to find unclaimed assets for state treasuries, and from discussions with other regulators.

However, even $1 billion is not large by life insurance standards. At of the end of 2010, life insurers’ assets totaled about $5.3 trillion, according to Steven Weisbart, a vice president of the Insurance Information Institute.

“Total death benefits paid over the past 20 years are about $600 billion,” says Weisbart. “In relation to that, $1 billion is 1/6 of 1 percent, or 0.17 percent.”

Manulife, which owns John Hancock, has already settled with both Florida and California and agreed to change its payment practices in both states.